DECISIONS DECISIONS

What is the fastest way to build wealth quickly in the financial markets? The answer is to own a concentrated portfolio. What is the fastest way to destroy wealth in the financial markets? The same answer.

Concentration doesn’t mean just one stock. It can also mean just owning a single asset class (all stocks, all real estate, all bonds, all gold etc.), or just companies in a single industry.

As a former employee of a large New York bank, I can tell you many tales of wealth disappearing as this company’s stock was in the $50’s in 2007 only to drop to $1 by 2009. It has since “rebounded” to $7- it currently trades in the $70s due to a REVERSE 10-1 split.

Owning stocks which we are familiar with and consider blue chip names may provide emotional comfort to investors. However, a quick look at some “blue chip” household names may prove interesting:

• Coke traded at $42 in 1998, 19 years later is up $2 to $44
• GE traded at $58 in 2000, 17 years later is at $22 down 62%
• ATT traded at $56 in 2000, 17 years later is $35, down 38%
• Pfizer traded at $46 in 1999, today is $36, down 21%

All this with the market making new highs almost daily. Some investors may have felt that the basket of stocks above, given as an example, provided reasonable diversification with premier companies in the consumer staple, industrial, telecommunications and healthcare industry respectively. However, the performance of those stocks has been very disappointing and could potentially have serious consequences on an investors’ lifestyle.

The example above doesn’t include the upside opportunities potentially missed as decisions had to be made whether to invest in new industries (e-commerce, social media, smart phones etc.) as represented by companies such as Google, Facebook, Apple and Amazon.

And to be frank, all these decisions can create a lot of stress. Whether to sell a “blue chip” stock as it goes down- or buy more, or whether to invest in a new company/industry are difficult decisions. The individual stock approach can create a lot of emotionally difficult decisions, and a lot of opportunities to make the wrong decision. Will this stock be the next Walmart or K-Mart, Apple or Compaq, Exxon or Enron? Nobody knows the answer at the time those decisions are made.

Our approach to investing eliminates the need for continuous single stock decisions for you and ourselves. We let the market and the combined knowledge of all the participants in the market work for us. As new companies emerge and prosper, our strategy includes them in the funds we use, and as companies go into their twilight year or worse, our goal is to own less or none of them.

There is no perfect way to invest. There are risks in every approach. But there are risks for which we believe you are not compensated and we don’t ask you to take. This is how we strive to put the odds of success on your side.

Thanks as always for your confidence and trust in us.
Beach

Views expressed are not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC.